(Bloomberg) -- The split screen views of U.S.-listed Chinese stocks falling as the S&P 500 marches higher suggest that China’s pains are localized. That may be true, but one group of investors is not taking its chances.  

Hedge funds that make both bullish and bearish wagers on stocks are slashing their exposure to American companies that lean heavily on China for businesses, such as Las Vegas Sands Corp. and General Motors Co., according to data compiled by Goldman Sachs Group Inc.’s prime brokerage unit. 

Companies with elevated sales from China were dumped as fund managers cut their net holdings by 26% over the month through late August to the lowest level since April 2020, client data from Goldman show. Meanwhile, those counting on the Asian country for supplies saw their ownership fall 17% toward the bottom range of the past year.  

The swift retreat signaled a darkening mood that may go beyond worries over Beijing’s sweeping regulatory crackdowns. 

Yes, stocks like Alibaba Group Holding Ltd. sank after Chinese President Xi Jinping sought to rein in the power of tech behemoths. But the shift in positioning in China-exposed U.S. firms highlighted deeper fears: What if China fails to control the Covid-19 pandemic and more ports are shut? What if the country, the world’s biggest growth engine for decades, is faltering? 

“U.S. hedge funds are getting more concerned about the place of China in the global economic system,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. They’re “less willing to bet on the continued favorable record” that the country has had, he added, referring to China’s openness to foreign businesses and investors. 

The basket of companies with China sales exposure has trailed the S&P 500 by 1 percentage point since June, and is poised to snap five quarters of outperformance, the longest since Goldman’s data began in 2016. That set of stocks -- once market darlings buttressed by the specter of faster growth -- has seen its luster depleted amid signs the world’s second-largest economy is losing momentum.  

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Now, it could be that the hedge funds’ actions were knee-jerk reactions to a violent rout that sent U.S.-listed Chinese stocks to one of the worst bear markets in decades. The KraneShares CSI China Internet Fund (ticker KWEB), tracking stocks like Alibaba and Tencent Holdings Ltd., wiped out more than half its value in a span of six months. 

Few on Wall Street expect Beijing’s crackdown to morph into a systematic market threat to the rest of the world. At the height of the carnage, strategists at Goldman and JPMorgan Chase & Co. urged investors to stay calm, calling the China risk a local problem. 

If anything, the rout in Chinese tech stocks may have prompted money to rotate into their U.S. counterparts. Indeed, internet and software makers have jumped back to the top of America’s leaderboard, with the group beating out every other industry in the S&P 500 during the past three months.

It’s not that U.S. big tech is less regulated, but that any changes to regulations have to be debated and agreed upon by both political parties, which slows the process and points to a more favorable backdrop, according to Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. 

“The U.S. is still a law-based society, and under the law, who has more capital, who has more resources usually wins in that kind of legal system. In that sense, it’s beneficial for the large technology companies and that does give them a premium,” Ren said. “In China, those technology companies have no control over their own fate in terms of the regulatory or the legal environment.”

While it’s up for debate whether China’s slowdown is temporary, or the country faces structural issues that may limit its economic outlook for years to come, investors are not waiting to find out. Goldman’s hedge-fund clients sold shares of China-exposed American stocks in nine of the past 11 sessions through Aug. 26, with short sales rising.  

“The link between China and the U.S. isn’t as strong as it would be with other countries, but I don’t think that precludes a real severe slowdown in China from indirectly impacting the U.S.,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. 

At the moment, U.S. companies doing business in China face potential risks of slower growth in the country and increased regulatory scrutiny, he added. “In either case, the logical thing to do would be to reduce your exposure to companies that have either one of those situations.” 

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